EITM: Aggregate and Individual Behavior: Bringing Theory and Empirics Together

The primary objective of the proposed research is to study the aggregate and policy implications of non-convexities at the microeconomic level. There is ample evidence that non-convexities matter at the individual household and firm levels. The open question is whether there are aggregate implications of these non-convexities. Answering this question is important for both understanding aggregate fluctuations and for policy evaluation. The applications proposed here share a common research methodology: the specification of a model of dynamic optimization at the individual (firm or household) level combined with estimation through indirect inference. Thus the empirical work is directly tied to the formal modeling of individual behavior. Due to non-convexities, these applications rest upon a dynamic discrete choice framework. The goals of the research are: (i) to utilize this methodology within a dynamic general equilibrium setting to evaluate aggregate implications and (ii) to explore policy applications, such as investment tax credits.

Broader Impacts of Proposed Activity

The proposed research will have three broad impacts. First, the work will advance our ability to evaluate the impact of tax and subsidy policies on the economy, both at the micro-level and at the aggregate level. This pertains directly to policy that might subsidize the purchases of firm and household durables. These research results will be disseminated through circulating papers and participation in scientific conferences. Second, part of the proposed work is intended to create data summaries in the form of moments that will be useful to the research community. Third, the proposed work will include a sharing of research techniques to enhance the linking of formal modeling with empirical studies by other researchers.